Following on from last week’s post, I’ve continued calculating the income tax that an early retiree (what I like to call “Jailbroken”, in a financial sense) who brings in $37,000 in investment income (interest, dividends, capital gains) would expect to pay to the various U.S. states. As a reminder, the specific assumptions about income that I made are:

  • Ordinary dividends: $20,000, of which 80% ($16,000) are qualified dividends
  • Taxable interest: $3,500
  • Tax-exempt interest: $1,500
  • Capital gains on sale of stock: $12,000

For the most part (but not always), states don’t care where the money came from (it’s all just income), so the total income here is $37,000. This should give a $50,000 lifestyle if the capital gains come from sale of stock whose value has roughly doubled since purchase.

As far as details go, I used the married-filing-jointly status, with one child, because that’s me. I didn’t account for any situation-specific tax credits in any state, because I don’t qualify for any and that would just muddle the comparison. Your mileage may vary.

The new additions to the table below complete all states along the Eastern seaboard and the Gulf coast. The results already included all of the Mountain west. What remains to be done is mostly the midwest, which will come next.

The Results

No state has yet tied California’s exemplary performance (of zero tax liability); in fact, the lowest-tax addition to the table is in fourth place (Connecticut). Step across the border to Massachusetts, though, and you enter the highest-tax state that I’ve yet encountered. Step across the border again to Rhode Island, and you fall back into the sixth-lowest tax liability in the table.

This border-stepping difference is a common theme, actually. Living in North Carolina would cost about $1,000 in taxes; hop over to South Carolina and owe only $400.

The wealth of states doesn’t help much in explaining the differences. Arizona and Alabama, for example, rank 44th and 45th in terms of GDP per capita; but their tax liabilities are different by $1,000, enough to put them at opposite ends of the cost spectrum. Similar politics doesn’t necessarily mean similar tax structures; California and Massachusetts would seem to be equally blue states, to recite a stereotype. They are at the top and the bottom of the table.

I’ll save any further commentary for the next installment, when I’ve finished calculating the taxes in the rest of the country. I’ll just repeat here what I said before: state taxes are one small component of the cost of living in any given state, with other significant components being property and sales taxes, general costs of necessities like groceries and fuel, differing necessities like heating oil in the northeast vs air conditioning in the southwest…so it would be unwise to base any decisions about where to relocate based only on the income tax numbers.

Also, to repeat: I’m no accountant, I’m just decent at following instructions. And the results below are provided only for entertainment value (oh, so entertaining!).

State Tax Liability
State Tax Liability  Notes
Federal $0 Thanks to the 0% tax rate on qualified dividends for low-income earners
Alaska N/A No personal income tax
Florida N/A No personal income tax
Nevada N/A No personal income tax
South Dakota N/A No personal income tax
Texas N/A No personal income tax
Washington N/A No personal income tax
Wyoming N/A No personal income tax
California $0 Progressive with fairly large personal and child credits
New Mexico $108
Maine $130 Generous deductions and exemptions but high rate (starting at 5.8%)
Connecticut $254 Generous deductions and exemptions for joint filers; could be up to $200 lower with a property tax credit, if a homeowner
Vermont $352 Low rate (3.5%) with all federal deductions/exemptions.
Rhode Island $355 Generous deductions and exemptions and low rate
South Carolina $385 Relatively low rates on Federal taxable income, so Federal deductions/exemptions apply
Arizona $394 Low rates and good deductions/exemptions
Idaho $468 Same deductions and exemptions as federal and quick ramp to 6%+ rate
Colorado $567 Flat tax on Federal taxable income without state-specific credits
New Jersey $581 See notes
Utah $667
Montana $755 Decent deductions but rates start at 5%; some preferable treatment of capital gains
New York $771 Moderate deductions and moderate rates
Louisiana $785 Moderate deductions and moderate rates
Mississippi $795 Moderate ramp up the brackets and good exemptions
Delaware $978 Relatively small deductions and exemptions
New Hampshire $1,010 Flat 5% on dividends and interest (not capital gains or W-2 income)
Tennessee $1,125 Same rules as New Hampshire, but smaller exemption; rates will go down 1% per year until 2021, when the tax will go away
North Carolina $1,068 Flat tax (5.75%) with pretty decent standard deduction (and child tax credit)
Pennsylvania $1,136 Low-rate (3%) flat tax with no deductions or exemptions
Georgia $1,159 Such a steep ramp in rates (max 6% by $7,000 income) makes Georgia effectively a flat-tax state
West Virginia $1,170 No deductions and small exemptions
Virginia $1,365 Modest deductions and fast jump to 5%+ rate
Hawaii $1,389 Very low deductions and exemptions and fast ramp to ~7% marginal rates
Alabama $1,398 Fast ramp up the brackets makes this almost a 5% flat tax; modest deduction/exemption
Maryland $1,470 See notes; could be as high as $1,809 based on locality.
Kentucky $1,817 Laughably low deductions and exemptions and a marriage penalty. A somewhat better result can be gotten by filing separately.
Oregon $1,882 Small deductions and credits and very high rates (9% after $8,000)
Massachusetts $1,887 Generous deductions and exemptions DO NOT APPLY to interest, dividends, or capital gains

Notes

  • If interest income is from U.S. federal obligations (Treasuries) it is not taxable as income by the states. In the above, I did not take that into account. But say, for example, that the $3,500 of interest income above is from a total-bond-market fund, such as the popular Barclay’s Aggregate…in that case, something like 30%–40% of the interest is from Treasuries and the taxable income in each state would be lower by about $1,000. This would have an almost unnoticeable effect in the high-tax states but would make a very measurable difference in the low-tax states.
  • New Jersey is easily the most infuriating state yet, if only because even getting the tax forms from the official source requires installing Adobe Acrobat. Since I refused to do that, I got it from a third-party source. Although I don’t guarantee any of the numbers here, I really don’t guarantee New Jersey’s. On a practical note, New Jersey allows the deduction of property tax, or if a renter, 18% of rent. For someone renting a place at about $1,000/month, that will reduce the taxes by about $50. This isn’t included in the table, though, because the actual amount will be very situation-specific.
  • Maryland collects local tax as well as statewide tax through its state tax forms. I used the lowest local rate in calculating the number in the table. Using the highest local rate, the tax could be as great as $1,809.

Finance

I’m a detail-oriented person—too detail-oriented, sometimes, for my own good. While I’m perfectly capable of thinking big-picture, I sometimes just enjoy figuring things out, even if those things aren’t particularly important in the grand scheme of things. There are many such examples in the realm of personal finance, and one of those is state income taxes. For the most part, we (like most other people) will choose where we want to live when we’re Jailbroken partly by considering costs, but mostly by considering where we want to live and what we want to do. So cost of living is an important but secondary factor, and state income taxes are a secondary factor when determining cost of living. In engineering we often just ignore such second-order effects—but, of course, we have to know that they’re second-order before we ignore them.

There was a discussion recently over at Our Next Life (here) about whether California was a good place for an early retiree to live, given its reputation as a high-tax state. The prevailing answer to that question was based on, first: do they want to live in California? Yes. Then: can they afford the taxes? Yes. But it was an open question about what it meant to afford the taxes.

So my curiosity led me to wonder how the states stack up in terms of taxes on what we might expect an early-retiree budget to look like, rather than based on the metric of highest marginal rates, which is how states are usually ranked. Online tax estimators aren’t really much help in this, because the best of them seem to ignore things like deductions and credits, which can vary wildly between states, and they generally assume your income is earned income, which can be treated very differently than investment income. So, wanting to know what we’re dealing with, I decided to fill out some tax forms and see.

Estimating State Taxes

Filling out state tax forms can be easier than the federal forms, often because the numbers are based on the federal numbers, which you’ve presumably already calculated; but they can also be more difficult, because if the rules are arcane they can be hard to apply properly. I give kudos in particular to West Virginia, which has a form that fills itself out once you’ve given it your numbers: why don’t all states do that? At any rate, the process is actually pretty repetitive and I quickly got the hang of how the states deal with income. So except for the outliers that have strange rules, it didn’t take much time.

As of right now, I’ve calculated the taxes for 17 states (plus 7 that have no income tax) that represent places that are attractive to me for one reason or another. I’ll add to the list as time goes on, which will be permanently hosted at http://plottingforjailbreak.com/state-taxes/. The goal is to have all 50 states represented. The data table for what I have now is reproduced below.

For income, I assumed the following:

  • Ordinary dividends: $20,000, of which 80% ($16,000) are qualified dividends
  • Taxable interest: $3,500
  • Tax-exempt interest: $1,500
  • Capital gains on sale of stock: $12,000

For the most part (but not always), states don’t care where the money came from (it’s all just income), so the total income here is $37,000. This should give a $50,000 lifestyle if the capital gains come from sale of stock whose value has roughly doubled since purchase.

As far as details go, I used the married-filing-jointly status, with one child, because that’s me. I didn’t account for any situation-specific tax credits in any state, because I don’t qualify for any and that would just muddle the comparison. Your mileage may vary.

A couple surprises that have shown up already:

  • California, despite being considered a high-tax state, would tax this income profile at $0. The state’s tax structure is highly progressive and taxes don’t even kick in until an income level a bit higher than what is assumed here.
  • New Hampshire, often considered a no-tax state, has one of the highest taxes in the ranking. That’s because, while they don’t tax earned income, they do tax investment income, without deduction or exemption. All else being equal, one would save almost $1,000 per year by just hopping the border and settling in Vermont or Maine instead.

All else is not always equal, though, and state income taxes are only one part of the total financial picture for someone in Jailbreak. Property taxes, healthcare costs, and overall cost of living can swamp the effect of state taxes. But like anything else, you never know until you sit down and figure it out.

A note about the rankings: the table is sorted in order from lowest tax liability to highest. This ranking would probably be preserved fairly well if the income in question varied plus or minus around $10,000; but much more variation upward would start to shift things significantly as states with progressive tax systems begin to overtake those with flat taxes. For a similar ranking of states, but for roughly double the income, see State of Confusion: Does Location Matter for Retirement Taxes? (Beware the limitations of the tax estimator used for those estimates, though: the “New Hampshire effect” is clearly absent there, for example.)

The Rankings

Note: there is an updated table with 13 additional states in a more recent post.

Obligatory note: I’m not an accountant, and this list is for educational purposes only. I am very good at following instructions, though, which is almost all of the battle when filling out tax forms.

State Tax Liability
State Tax Liability  Notes
Federal $0 Thanks to the 0% tax rate on qualified dividends for low-income earners
Alaska N/A No personal income tax
Florida N/A No personal income tax
Nevada N/A No personal income tax
South Dakota N/A No personal income tax
Texas N/A No personal income tax
Washington N/A No personal income tax
Wyoming N/A No personal income tax
California $0 Progressive with fairly large personal and child credits
New Mexico $108
Maine $130 Generous deductions and exemptions but high rate (starting at 5.8%)
Vermont $352 Low rate (3.5%) with all federal deductions/exemptions.
Arizona $394 Low rates and good deductions/exemptions
Idaho $468 Same deductions and exemptions as federal and quick ramp to 6%+ rate
Colorado $567 Flat tax on Federal taxable income without state-specific credits
Utah $667
Montana $755 Decent deductions but rates start at 5%; some preferable treatment of capital gains
New York $771 Moderate deductions and moderate rates
New Hampshire $1,010 Flat 5% on dividends and interest (not capital gains or W-2 income)
West Virginia $1,170 No deductions and small exemptions
Virginia $1,365 Modest deductions and fast jump to 5%+ rate
Hawaii $1,389 Very low deductions and exemptions and fast ramp to ~7% marginal rates
Kentucky $1,817 Laughably low deductions and exemptions and a marriage penalty. A somewhat better result can be gotten by filing separately.
Oregon $1,882 Small deductions and credits and very high rates (9% after $8,000)
Massachusetts $1,887 Generous deductions and exemptions DO NOT APPLY to interest, dividends, or capital gains

Notes

  • If interest income is from U.S. federal obligations (Treasuries) it is not taxable as income by the states. In the above, I did not take that into account. But say, for example, that the $3,500 of interest income above is from a total-bond-market fund, such as the popular Barclay’s Aggregate…in that case, something like 30%–40% of the interest is from Treasuries and the taxable income in each state would be lower by about $1,000. This would have an almost unnoticeable effect in the high-tax states but would make a very measurable difference in the low-tax states.

Finance

Our Legendary Venetian Holiday

Some years ago, in a distant, halcyon past redolent of youthful vigor and young love, I packed my bags and boarded a plane bound for Venice. For me, La Serenissima wasn’t just a vacation destination. It was where I would see my wife for the first time in six months, and where we would spend an enchanted week of culture, learning, and most importantly togetherness. Because while I had been in the United States, working a normal job and living in a normal suburb, she had been dodging bullets and death threats in one of the Middle East’s most unstable countries, working in decidedly un-normal conditions. When an opportunity came up for her to get away for a short vacation, we decided to meet in the middle; and after considering a number of worthy candidates—Paris, Vienna, Rome—we settled on as tranquil an environment as we could find, to form the greatest possible contrast with her quotidian reality. The Most Serene City fit the bill perfectly.

And so we did—I arrived at the airport in Venice just hours before she did, met her at arrivals with an enormous smile and commensurate hug, and swept her off to the apartment that I had pre-arranged for us on the Giudecca. The week was pure magic—we marveled at the art in the Doge’s palace and the Basilica di San Marco, not to mention in a dozen other palazzi all over the city; the city itself was a museum for an architecture lover like her, with the crazy conglomeration of Byzantine and Renaissance façades looking out onto the canals. We rode the vaporetti up and down the Grand Canal, under the stately stone bridges with their intricate reliefs and sordid histories; we rode them around the city’s Medieval walls, erected to defend against incursions by Germanic chieftans, Ottoman sultans, and Florentine dukes; we crossed the waters further afield to Murano, where intricate glasswork from Venetian artisans has been refracting sunlight into beautiful displays for nearly a thousand years. Dressed in our stateliest, we took in a symphony in the city’s pre-Napoleonic grand concert hall; when we weren’t being nearly so cultured we challenged ourselves to eat as many flavors of the city’s gelato as humanly possible. And all the while we were together, blissfully happy to have erased—at least temporarily—the ten time zones that had separated us for the past year.

That vacation was legendary. It has a permanent aura, a golden frame, that enshrines it as one of the Best Times of My Life. I look back on pictures, or simply recall moments in my mind, and the joy that I felt then returns to me. It has been over five years since then, and I believe that my wife and I were acting out an Italian love story without equal in all the legends and mythology of that inventive country.

What do I not remember about that trip? Unless we are specifically recalling it, I do not remember how the electricity in our apartment went out one night, leaving us stranded in darkness, without a stove to cook on and without air conditioning to make the hot Venetian summer nights bearable. I do not remember how I walked across the Giudecca to buy a pizza that night, and asked them to light a candle for me, as we had no matches and the stores were closed, and how I carefully protected that flame for my entire transit of the island, until as I stood on my doorstep a sudden gust of wind snuffed out our hopes for evening light. I also don’t remember how, with the windows open to make the hot air bearable, we both ended up bitten by a small army of mosquitos, or how all this went on for several days because we couldn’t get hold of the landlord. (For the record: someone eventually left the circuit breaker room unlocked and unattended one morning, and I stole in and restored modernity to our dwelling.) I also generally don’t remember how, the very night that we attended the symphony in our best clothing and most attractive—read: uncomfortable—shoes, the vaporetto drivers went on strike and left us with a mile-and-a-half walk home over quaint and uneven cobblestone, which was so punishing on my wife’s feet that we could walk nowhere the next day. Or how the only possible flights that we could take out of Venice at the end of the week were at five in the morning, meaning that we were waiting for the airport bus on the side of the road at two o’clock on our last night. And all this says nothing of a food “adventure” or two.

Emotional filtering and our outlook on life

What gives? Why do I not remember the painful, the less-than-perfect, parts of that vacation? At first, you might think it was because, heck, I was in Venice! But I’ve been on vacations before where things also did not go well, and I remember that they didn’t go well. But this was different: I wasn’t there to pretend I was cultured, or to hit the night life—really, I could have been not in Venice at all—but I was there to see my new wife, and it had been a long time, and that was the most important thing. And that went perfectly. I showed up. She showed up. Nothing else was really necessary.

Our brains tend to filter, and my brain filters the mild (in retrospect) inconveniences out of the overwhelming success of the trip at large. There is no need for me to dwell on the propensity of the Italians to strike, or my general distaste for mosquitoes, or any of the other failings of circumstance that were part of the entire tapestry of our vacation. A few misplaced brushstrokes do not mar the masterpiece. I believe that our brains do this sort of filtering automatically, based upon our goals with respect to the memories. Do I want to remember how painful it was to get my graduate degree? Then I remember the late nights in the lab, the difficult discussions with my thesis advisor, the feeling of uncertainty and drift that pervaded my relationship to my work. Or do I want to remember the joys of my sojourn at one of the nation’s best (and most beautiful) universities? Then I remember the blooming of the dogwoods in the spring, the large cohort of friends that I made, the delight of learning new things, and the circumstances of meeting my future wife. I choose which set of memories to dwell on. I choose whether it was a good or a bad time.

How we choose to approach our memories is an indicator of how we view our lives—if we adopt a narrative of victimization, we are sure to see persecution all around; if a narrative of misfortune, we will look back to see poor choices and an endless stream of bad circumstance. But if our life narrative is one of advancement, joy, and triumph, then that is what we will see in the flow of our memories.

Some people have more misfortune than most, and some have more triumph than most. Objective differences in our lives exist and are important. But those objective differences are usually not the things that drive our personal narratives. Some incredibly successful people are incredibly depressed, and many that our world would consider most misfortunate are some of its happiest people. I think we’ve all heard the stories of the jaded Westerner visiting a poor country and making observations of the happiness found among the poor of the place. Poverty or wealth have little to do with happiness—this much is substantiated scientifically. Instead it’s a set of conscious choices that pervade our subconscious approach to life.

Translating to now

If all of the foregoing is relevant to memories, then it is also relevant to our experience of the present. Am I happy with my life right now? The answer in large part is determined by what I fixate on. For example, I spent just enough time traveling for work in the State of New York this year that I’m required to file an income tax return there, despite having never lived there or having any connection whatsoever with the place. That’s going to suck a bunch of hours out of my life during Spring 2016 as I figure out how to fill out yet another set of forms, along with my regular state and federal tax forms. I hate paperwork.

On the other hand, I had a job that was mostly interesting, challenging, and that advanced the frontiers of science during 2015. I got to visit my grandmother’s childhood home outside of Buffalo and Niagara Falls during my weekends in New York. I even managed to swing an anniversary trip to New York City with my wife as a result of the traveling. And the company topped off my income to cover the extra expense of New York taxes.

So what am I going to focus on? The drag of filling out some extra paperwork? Or the awesomeness that surrounded and resulted from my circumstance? I choose to be positive.

And this, I believe, is the definition of gratitude: to recognize the good in life, and to give it priority over the bad. It’s not a function of the good-to-bad ratio. That can be quite small, and a person can still be grateful. It’s a function of the amount of attention given to the good compared with attention focused on the bad. While that’s not necessarily an easy mental discipline, it nevertheless is a discipline. A choice to be made.

So file the bad things in life away into a mental “to-do” folder, and deal with them expeditiously. Then celebrate the good and give it center stage. Developing gratitude for the blessings in life, despite whatever else might be there, is one of the essential components of Jailbreak. It’s the shovel with which the escape tunnel is dug.

For those in the US, happy Thanksgiving!

Jailbreak Philosophy

I just stumbled upon this report from 2014. Apparently people would rather electrocute themselves than spend 15 minutes alone. We have all become mentally hyperactive, and when we don’t have a smartphone, a puppy, or a rave to distract us, we go nuts. Apparently.

From the abstract:

In 11 studies, we found that participants typically did not enjoy spending 6 to 15 minutes in a room by themselves with nothing to do but think, that they enjoyed doing mundane external activities much more, and that many preferred to administer electric shocks to themselves instead of being left alone with their thoughts. Most people seem to prefer to be doing something rather than nothing, even if that something is negative.

Some of my most precious time is that in which I am free to think, undisturbed by anything; sometimes a rhythmic, repetitive action like walking helps to quiet the mind but other times just staring, lost in thought. I have some suggestions for the mentally distracted world in which we live:

  • Adopt a low-information diet. Some things you need to know about. Other things you don’t. Make a conscious effort to triage the information you consume—no one, not even the most informed, can keep on top of everything. Figure out what’s important, and follow it.
  • Consume real food (for your mind). Celebrity gossip, internet quizzes, and shocking stories of inventions by real moms are not important. Unless you somehow make a living or are otherwise involved in this sort of thing. If so, shame on you.
  • Practice.  The key to being comfortable alone with your thoughts is to do it and find the benefit there. I promise you, it is.

But as Thoreau says, some people would rather do just about anything than spend time with themselves. The research in the Science article just brings to modern day a nugget of wisdom that is timeless.

Living with constant mental noise will never allow a true Jailbreak ethos to take root in your life. Put down the phone—turn off the TV—turn off the radio—and spend some time quietly thinking. Sure beats administering yourself electric shocks, don’t you think?

Uncategorized

I’ve been traveling the last couple of weeks, and while traveling offers many thought-provoking experiences and opportunities to reflect, it can offer very little time to get those reflections out on a keyboard. So I offer up to you a small thought for the week: I tie my shoes differently now than I did when I was younger. If my experience is any indication of general trends, I tie my shoes differently than much of the population. Whether that’s the case or not, the fact is I changed how I tied my shoes one day.

Changing a long-ingrained habit is not easy. Our brains wire themselves ever more strongly with each passing repetition of a habitual action. Nobody consciously thinks about tying their shoes while they do it—it just happens reflexively. So to change one of these behaviors and re-wire that part of the brain takes a conscious effort, for a while, before the new habit takes the place of the old one.

I changed because it seemed worth it. I had seen a TED talk (see below) in which the speaker explained why a simple change in the sequence of hand motions produced a knot that was more robust and even aesthetically a bit better than the standard knot I was taught to tie. And I thought: I rarely care about how my shoes are tied, except when they come loose. But then again, if making an improvement requires such a small investment of effort, then surely it must be worth it?

If I have avoided two or three episodes of untied laces thanks to my mid-life reprogramming, then I’ve earned back the time it took to re-train myself in this simple skill. But the practice of upending habits and looking everywhere for improvement is an essential feature of the Jailbreak mentality. It is good for the brain, and in making improvements, it is good for life.

In similar fashion, I have in the past re-trained myself away from the QWERTY keyboard layout to the more-efficient Dvorak layout; I’ve changed the entire language of my computer operating system (and the keyboard) while learning another language; a thousand tweaks made to how I handle implements in the kitchen have improved the quality and speed of my cooking. Next up: breaking the tyranny of right-handedness and learning to write excellent script as a leftie.

What ingrained habit have you broken and replaced to make some small part of your life more efficient?

Small Observations

Today, I walked in sand.

Very fine, very dry sand is a fluid; it flows around your feet when you step in it, and runs downhill in little rivulets; the wind blows across its surface and sends up a spray, a mist of microscopic particles that caresses your bare legs and wets your clothes with a golden film of grit.  It engulfs in the collective mass of its atoms everything that stands in its path, a flash flood—though times in decades—that drowns beneath it anything too slow to get out of its way. Plants, rocks, tools, huts, houses and cities all succumb to the advance of the silica tide.

Walking on sand works where walking on water does not because the friction between the fundamental particles of the sand fluid exceeds that between water molecules. Step in the ocean, and the water parts before your foot: it displaced the water throughout the ocean, and could be measured an world away, if we but had instruments sensitive enough. But sand is not so yielding. It will accommodate your foot up to a certain point, allowing you to displace its particles; but at some point you have pushed too much, and no more sand will move before your step. The obstinacy of sand is what lets us walk on it. Its fluidity is what makes the walking hard.

In the desert, where this fine, dry sand lives, the wind whips up the its surface into an everlasting tempest. Towering sunburnt waves rise in formation, beating toward the sky in their decades-long, silent uprising against the tyranny of the wind. The dunes are everlasting, yet ever-changing. Moment by moment the wind sculpts and shapes their surfaces, adding here, subtracting there, so that the patterns written in breezy calligraphy down the slopes are never the same, whether comparing between points in space or points in time. But cease to consider the details of the patterns; stand upright, shield your eyes, and consider the sand en masse.  By looking at the dunes writ large, you are seeing statistically; andthe  statistics of the sands are constant throughout your view. The consistent distribution of rivulet widths, lengths, and branching patterns; the distributions of the dune heights and angles; the regularity of these can be seen at a glance. And so it goes—sand particles, on our scale, are identical; they form wildly different patterns when we observe their interactions up close; and their behavior becomes regular again as we pull away further. The sands are like people. We are all made from the same mould, from the same physical stuff; yet each one of us is radically different from every other one; yet societies the world over display a surprising regularity in customs and habits.

Who knows who the first people were to walk these sands? Did they survive the encounter, or did they grow weary, stop for a short rest, and then, when their rest extended too long, drown in the hot glacial deluge? Might they now form part of these sands on which I am walking?

It must have been thousands of years ago. Everything has changed since then. When the sun has gone down, I can see lights on the horizon—a city is nearby, filled with the buzz of electricity and information and civilization. The dome overhead, in which then hung only stars, now is home to airplanes and satellites whose trajectories may be followed across the ebony skies. And I can stand in this spot with no worries about what I shall eat, or what I shall drink, or if I shall ever make it to my destination. Indeed, this is my destination.

But to say all has changed is to think too small. If I ignore the city, and ignore the satellites, and look at the dunes; there, there I see what that first traveler saw. As if side by side, we see the same patterns in the sand and the shield our eyes from the same sun. In all probability my lungs contain several oxygen and nitrogen atoms that were in his lungs as he stood here, he sharing my view and I his. And there is an immutability to this; man may be about his business, changing everything in his power to change, and yet in the sand the patterns persist. Man may not change those. He may dig up the sand, and pour it out on a far  continent; but the wind will follow it there, and caress it into its eternal shapes, and it will continue to flow and engulf as it has since the beginning of time.

When the wind is blowing, my footprints disappear almost immediately as I walk away. My walk has not disturbed the sand in its massive progress. It does not care. Of whatever significance my walk is to me, the sand does not care.

Let’s remember this. Our universes revolve around ourselves because we see through our own eyes and act through our own bodies. But in realizing that our volition extends only as far as ourselves, we break the illusion that our wants and desires order the objective universe.  Even the most powerful people on Earth have no power to change the forces of nature, the combination of winds and friction that sculpt they sands. We are small, and our ambitions are small.

Our efforts are of grand import in our own lives; we have the power to shape our destinies and overcome odds. We are empowered to leave footprints in the sand, and to choose the direction in which they go. The philosophy of Jailbreak is all about thoughtfully choosing that path. If possible, we may lead others to a limited degree. But let us not have too grand an opinion of ourselves.  It is to our benefit to acknowledge that we are part of a grander scheme, and the wind will wipe away our traces when we are gone. And this is for the good; those who come after us will have the view unspoiled.

Jailbreak Philosophy

Don’t ask what the world needs. Ask what makes you come alive, and go do it. Because what the world needs is people who have come alive. —Howard Thurman

Part of what makes achieving Jailbreak difficult—mentally—is finding the necessary imagination to envision a world different than the one that we already know.  I’m not talking about John Lennon’s Imagine-style fantasizing about a universe made in our own image.  But I am talking about the ability to imagine, at the very least, that our own lives could be different than what they are.  This must always be the starting point for anyone who, as Steve Jobs liked to say, puts a “dent in the world.”  For nobody ever put a dent in the world by plodding the same well-worn paths that they have been tracing for years.  Not even Steve Jobs, whose roller-coaster life can be described as anything but stable.  (I have, incidentally, enjoyed his biography by Walter Isaacson so much that I’ve read it twice.)

Bold: How to Go Big, Create Wealth and Impact the World
Bold: How to Go Big, Create Wealth and Impact the World

I am not one for business or management books.  I read a few earlier in my career, and I learned something from each; and I would highly recommend a number of them to anyone who enjoys business and management.  I enjoy some aspects of business, but not management.  I do, however, love mental jailbreak.  So when I heard about Peter Diamandis’ new book Bold: How to Go Big, Create Wealth and Impact the World, I figured I should give it a try.  I even paused my most recent Nobel Laureate reading to take it in.  And I am glad I did!

Bold is divided into three sections, and the first two of those sections are essential reading for those anyone who values the ability to think differently, and who is into technology.  Diamandis, after all, is a part of the Silicon Valley establishment that has been asking us all to “Think Different” for the last half-century.  But I think that the first two sections of the book will also be of great value to artists, musicians, novelists, craftsmen: anyone who needs to both be able to focus intently on accomplishing goals and to back up and set goals in a larger strategic context.  And looking at life from a large perspective—and then executing on what you see—is the essence of jailbreak.

Consider the following meta-quote (a quote of a quote), which is originally from a book called Drive by Daniel Pink:

The science shows that…typical twentieth-century carrot-and-stick motivators—things we consider somehow a “natural” part of human enterprise—can sometimes work.  But they’re effective in only a surprisingly narrow band of circumstances.  The science shows that “if-then” rewards…are not only ineffective in many situations, but can also crush the high-level, creative, conceptual abilities that are central to current and future economic and social progress.  The science shows that the secret to high performance isn’t our biological drive (our survival needs) or our reward-and-punishment drive, but our third drive—our deep-seated desire to direct our own lives, to extend and expand our abilities, and to fill our life with purpose.

Right?  Right??  Who among us has experienced the motivation that comes from getting a new job making more money than we ever have before…and then discovering that a few years down the line the money, and raises, are no longer motivating?  The vast business literature out there will attest that monetary rewards are not the best way to motivate people past a certain point.  An individual’s progress climbing Maslow’s Hierarchy of Needs dictates that he will desire something more after his physiological and safety needs are met—he will desire self-actualization, the ability to direct his own life, and fill it with purpose.  Pre-jailbreak, one may not be able to see how to take control of his life; or if he can see it, may not be able to walk the path to gaining control.  Perhaps it is a mental block; perhaps it is a financial or family constraint; perhaps the cultural role he is expected to fulfill won’t allow it.  But making the most out of the short life that we all share in this world requires that we figure out what it means to direct our own lives, find and fulfill our purpose, and be the best human beings we can be.  And the quote by Howard Thurman at the beginning of this post suggests a strategy for doing it.  Find what motivates you—and then LET IT MOTIVATE YOU!*

Gartner Hype Cycle Indicators
Gartner Hype Cycle Indicators

But back to Bold.  Part I is all about exponential trends in digital technology (Moore’s Law and all the disruption to industries that it has created).  This should be very interesting to all comers, because it is ultimately about the evolution of the toolset that we all use, no matter what our field of interest.  Computers, cameras, machine shops, artificial intelligence, biology and medicine, space flight—it’s all there.  Engineers will engineer faster.  Photographers will create more spectacular shots and share their work more easily than ever.  Toy makers will find new niches that let them make a living out of their passion.  And the hype cycle—which, yes, has a lot to do with the progress of technology but is a common trajectory followed by many experiences in life—is a paen to the victory of perseverance.  One does not Jailbreak in a day.

Part II contains three sequences—two practical, one inspirational—that should be very useful to the aspiring Jailbreaker.  The first is an examination of flow, the mental state in which super-productivity or super-achievement is possible.  Think of the last time you read a book, did homework, wrote something, or had a fantastic conversation and time flew by without your realizing it.  Perhaps you had been struggling with writer’s block for days, only to find that everything came out all at once in an amazing stream of awesome.  Or you’d been colliding with a persistent problem with a co-worker or friend forever, and one conversation—suddenly and unexpectedly open, honest, and intimate—brought the complication to a close.  It turns out there are identifiable creative, social, and psychological triggers that let one get into such flow states; and through practice, one can engineer the right circumstances to enable such super-productivity predictably.  Whatever it is that you need to do achieve Jailbreak—and whatever you will do when you get there—finding flow will make it happen.

The second sequence in Part II is a discussion of credibility, and the need to be credible to make any of your plans happen.  Diamandis means this in a business or social context, but I believe that credibility is equally important in personal endeavors.  First, you need self-credibility: do you really believe that what you are trying to accomplish is possible?  If you don’t, no one else will—and it won’t be possible.  So do your homework.  Is your goal financial freedom?  Do some math and convince yourself that the numbers work.  Do you want to jump careers?  Find examples of people who have done similar things, and study their successes.  Want to hike the Pacific Crest Trail for months on end?  Best to start with some small overnight trips so you know what you’re getting into.  And the amazing thing is: once you convince yourself, you have most of what you need to make your goals seem credible to others—any others who might matter.  Spouse, friends, parents, bosses.  Bold has some specific suggestions for winning over skeptics: build a crowd of believers, starting with those close to you who are well-respected enough to lend weight to your arguments; take it slowly (again with perseverance); and think carefully about how you present the message.  I loved his use of the old story Stone Soup as an illustration.

And the third sequence is the recounting of the life stories of people like Elon Musk, Richard Branson, and others who have changed the world for the better, starting out with little more than their own force of will.  The Steve Jobs “Reality Distortion Field” is very much in evidence.

Part III is much more focused on entrepreneurs and those trying to accomplish something very large in the business or social sphere.  It isn’t so important to those who are trying to think big in the context of their own lives, as they do when Plotting for Jailbreak.  Many of the suggestions there may be obsolete in a few years’ time. But if you do read the book, be curious and flip through it; you never know what you may be inspired to find.

Jailbreak is a bold philosophy.  It is easy to accept life the way you found it, to listen to the majority, to plod step-by-step on a path that keeps you going to you-know-not-where (the “culture”).  It is equally easy, and lazy, to assume that the opinions of the majority are always wrong, that you must rebel against your upbringing, and that most people are mindless sheep (the “counterculture”).  The truth lies between these extremes, and it is not easy to find.  Those who dare to make themselves better, who balance on the narrow way between blind faith and arrogant pride, must be bold.  And if it sounds like this book could help you develop a bold mindset, it is worth a read.

*I believe that Jailbreak is never accomplished by running away from life, abandoning responsibilities, or selfish grasping.  Those who take that route to self-actualization usually find that they have hollowed out the middle of Maslow’s Hierarchy—that is, they’ve given up on love and belonging, and on self-esteem and the esteem of others.  The driven career professional reaches his pinnacle with a divorce (or two) under his belt.  Regret catches up with the father who has abandoned his children.  And our favorite Christmas villain Scrooge (and his counterparts in reality) amass enormous wealth and have not a friend to show for it.  No, this method of trying to accomplish Jailbreak is just a prison transfer—one jail to another.  True jailbreak is accomplished by showing up for life, making the right decisions, and becoming better day after day.

Book reviews Jailbreak Philosophy

Silence. So many kinds of silence. Deep, still pools of tranquility. Whispering voices of tentative zephyrs stroking millions of paper mâché leaves in autumn forests. Gentle hums of indistinct human voices murmuring prayers in a stretching cathedral. The never-ending roar of the city, ceaseless as the mountain waterfall. Silence is everywhere, if you can find it, because it’s not an imposed axiom of environment, but a transcendent construction—or rather emergence—of the mind.

Food, shelter: the basic needs of human life, the can’t-do-withouts of physical existence. Love: the sine qua non of spiritual existence. Silence: in which everything finds its value, its authenticity, its reliability.

You say, How can silence be as important as food and shelter? Well how then is rain more important than sunshine to a growing flower? It is all needed, all important; but the Scriptural wisdom of the ancient maintains that “better is a little on the rooftop than plenty in a house of strife”.

Or how can silence outweigh the importance of love? It doesn’t, any more than the sense of taste outweighs the importance of eating. The latter can be had without the former. But who truly experiences the joy of a wonderful food without tasting it? And who really knows love if he has never rested, silently, secure in the knowledge that he loves and is loved unconditionally, apart from all words and demonstrations?

Silence is not well-regarded in the social and technological milieu pulsing on our every side. In the office, emails and phone calls and stop-ins and meetings and reports shout into our every moment, demanding our attention and response; productivity, the aim of every manager, comes to be defined not by the quality of thought and product you create, but rather by how much you add to the noise. Stay quiet, and risk being ignored in the daily fracas. It’s nearly impossible to drown out, anyway. In the wild, sounds that are quiet and distant indicate something not important; the loud and immediate requires our attention. But there is no dissipation in the electronic, no attenuation of things unimportant; everything shouts equally loud in an email box. Other people’s problems in a meeting take as much of your attention as your own. Put up filters to allow yourself to think, and be rebuked because you are unresponsive.

Not that too many have that problem: the banishing of silence from our lives outside of work is big business. Apple made sure we could distract ourselves with infinite variety when it introduced the iPod; the iPhone ensured that we could distract ourselves with the infinity of the Internet when no one was available to talk. The business of distraction is not just recently lucrative either: I suspect the Greek playwrights, Shakespeare, and the great novelists all filled and monetized a social yearning for distraction; Hollywood and the rest of the modern entertainment industry has been minting money from it for years. And if that’s a bad thing—nuance is not dead here—it’s not the fault of companies, technologies, or franchises. It’s our fault, for so willingly and easily distracting ourselves. All the time.

Taking in a little news helps keep us informed about our world. Obsessively watching cable news networks creates an echo chamber of too-strident opinions that leaves out ears ringing and our minds thinking of nothing else. Who doesn’t know folks who will divert any conversation into politics within five minutes of saying hello? The same is true of celebrity gossip. The financial press. Food!—the quasi-religious obsession of millions of paleos, primals, vegans, locavores, Monsanto-haters, fair-traders…There can be too much of a good thing, and we all go there. Sometimes our obsessions qualify us as quirky, sometimes as self-righteous pricks. Either way, obsessions need fuel like fire, and we choose what we feed ourselves. And not only do we choose what to feed on—we choose to feed in the first place. Nobody ever said that was required.

Constantly eating more food than we need leads to adverse systemic consequences for our bodies. Why should it not also be true of our minds? What would we be like if we gave ourselves time—quiet time—to digest what we put in our minds? Would we be a community of people who actually think for ourselves about important issues, instead of mouthpieces for our favorite media outlets? Would we shine with a light of true individuality, rather than with the dull reflection of groupthink emanating from our Facebook feeds?  Would we be comfortable voicing the produce of our minds in deep conversation, instead of referencing someone else, experts who, in all reality, have no more innate intelligence or ability than we do? Are we consuming the mental equivalent of huge amounts of empty calories, and suffering mental obesity as a result? Could we not rather consume small quantities of nutritious material and allow ourselves to truly absorb its goodness?

Silence is where we digest. Where we allow our mental filters to clear the detritus of our chaotic lives from the flow of our consciousness. It’s a detox, a cleansing, a freeing.  It’s where the rust falls off our souls and the scales fall from our eyes, and where we are finally able to see the world for ourselves and, more importantly, where we can see ourselves for ourselves. In the midst of a silent moment, when no one else has our ear or attention, we can finally listen to our own voice and find out what we actually think and who we actually are.  We find answers to questions about ourselves and discover which questions about the world are truly important to us. What is golden stays with us after the silence has polished away all the dross.

But this is all obvious. Monks of every religion have for millennia taken vows of silence to connect to themselves and something higher. Artists, authors and poets retreat to the mountains or the beaches or Venice—anywhere but their normal here—to free their hands from the quotidian grasping so that they can instead reach inside themselves and unearth that which is truly extraordinary. Maybe the best of them produce something of great worth to others. But all of them produce that which is of great worth to themselves. And what gives value to any of it? What gives value to anything? Scarcity—that great economic force that makes air free and diamond dear. So few people find their own voice, the true expression of who they are. But only we can find ourselves, and there is only one of us. No one else can sell us ourselves or mass produce our souls. To ourselves, we are the scarcest of resources the universe has ever known.

Yesterday I walked, aimlessly, through the river parklands in Perth, Australia; today, I set out to find some peace near LAX while laid over on my way home. I find walking to be my quickest way to silence the mind. It’s meditative: one foot, next foot, straight line, breathe in, breathe out. It takes me far from where I was, surrounds me with novelty. If it doesn’t require much thought—the danger of being hit by a car is low, I’m not late for anything, I’m not likely to be mugged—then my mind is free to wander, shake off its stiffness, stretch out. Silence outside promotes silence inside: the Kookaburra calls of the Perth parklands are better that the searing, stinking fumes of the LAX arrivals level. But it’s the act, the motion, that leads to transcendence. History is full of pilgrimages, Caminos de Santiago, that lose their power if motors are involved. There is no rhythm in the seat of a car: the crankshaft converts the cadence of the  combustion to smooth rotary motion. Airplane jets have no rhythm to begin with. Physically nothing is different than sitting at home. But walking, perambulation, keeps the mind alert and clear at the same time. Second best is the rhythmic swaying of horseback: if they were so inclined, the solitary cowboys of the West must have been the most contemplative of men. Is it any wonder that King David, a man after God’s own heart, was found among the lonely shepherds of Israel? The true value in a pilgrimage is, cliché, in the journey rather than the destination. I don’t know much about the Muslim hajj, but I hope it provides their faithful more peaceful contemplation than the pictures suggest.

We take moments of silence to remember those who have given their all in sacrifice to a higher purpose—defending the cause of freedom, spreading hope to a dying world—and in that silence we find remembrance and understanding. But when we can, we should go beyond dipping our toes in those clear, bracing waters; we should wade in, surrounding ourselves in silence, dive deep, hold our breaths, and, gasping, throw ourselves back on the shores of daily life with the peace that we found still dripping from us. We should give big wet hugs to the people we meet there. And when we’re comfortable enough in our own skins, we should invite those we love to join us…because peaceful silence, together, can be the conditioning oil to repair the dry, cracked leather of our relationships. And if all the world joined us, what better people we might be; what a multitude of hurts would be healed; and how much more peace would find its welcome in the world?

So find your silence. You need it. And the world needs you to find it. Whatever your place, whatever you have to give to the world, do this first: let silent contemplation be your offering.

Jailbreak Philosophy

We talk quite a bit around here about philosophy, literature, long walks; the idea is to discuss different ways of seeing the world, points of view that expand our horizons and allow us to incrementally break out of the Jail that our minds fit themselves into over time. Once in a while, we also talk about personal finance—for one of the things that keeps many people too distracted to stop and see things differently is a constant pursuit of money and consumption of stuff that it can buy. The earlier manifesto laid out one alternative approach to money, whose punch line is this: money shouldn’t be used to buy stuff, it should be used to buy freedom. In fact, my wife and I originally created the term Jailbreak to refer to finances: breaking out of the rat race that held our time and best mental cycles behind bars. It evolved into what it is today as we reflected on how the relationship with money is only one part of an issue that pervades our larger lives.

So I, being an engineer, love to play with the numbers that relate to financial Jailbreak: how much money do we need to save to retire early, how much passive income do we need to live, and just where would it go? I’m not alone; many of my fellows on the internet discuss these things on forums and blogs of their own, analyzing early retirement scenarios until they are blue in the fingers. Today’s post fills a gap that I haven’t seen addressed anywhere else: the relationship of the Safe Withdrawal Rate (SWR) to the Price/Earnings (PE) ratio of the stock market.

The slow dance of SWR and PE

What is the SWR?

A quick background, for those not intimately familiar with the subject: start with the assumption that you have a truckload of money saved for retirement, and you want to know how much of that money you can spend every year and not run out before your retirement ends. Assume, also, that your money is invested in stocks and bonds that earn passive income, but whose prices fluctuate with the market. The answer to how much you can spend each year is impossible to know ahead of time, because nobody knows how the stock market will perform during your retirement. On the other hand, it’s simple to calculate for hypothetical retirements that occurred in the past. So if, for example, you pretend to have retired in 1955, all of the data exists to calculate the percentage of your money you can withdraw every year, adjusted for inflation: your SWR.

The calculation of the SWR was done first by William Bengen, and then by the Trinity Study; Wade Pfau has updated and summarized the arguments. The findings are summarized in Figure 1.

Safe Withdrawal Rates
Figure 1. Safe Withdrawal Rates as a function of retirement year.

The history of a whole movement can be summed up as follows: in all of recorded US market history, the Safe Withdrawal Rate has never been below 4%. So if you have a cool $1M invested, you can spend $40,000 annually, adjusted for inflation, over the course of your 30-year retirement, and never in history would your strategy have failed. The 4% SWR has become the dominant rule of thumb throughout the personal finance and retirement planning spheres. No matter where you turn, you will find a discussion. See Mr. Money Mustache, Go Curry Cracker, jlcollinsnh, and more.

What is the PE ratio?

Buying a share of stock (Apple, IBM, Johnson & Johnson…) is buying a small piece of a company, and, in theory, the rights to a share of the profits (the earnings) of that company. There’s a large academic literature out there about how to value shares of company stock…what is a reasonable price? One measure that usually comes up is the PE ratio, which is, as its name implies, the ratio of the stock’s price to the company’s earnings per share. A stock with a PE ratio of 10, for example, is priced at 10 times the company’s earnings per share. Another way of looking at that is to invert the ratio: the earnings are 1/10 = 10% of the stock’s price, and you can think of that as, roughly, the return on your investment. You won’t actually get paid 10% for owning the stock, though; the company may pay dividends (say, 2%), the stock’s price may grow a bit, and the may invest the rest of the earnings in growing the business or developing new products. Since you own (a part of) the company, the benefits of all those activities accrue to you, in cash payments or in the prospect of future growth.

So what are people willing to pay for when buying stocks? They’re willing to pay, as it turns out, anything from 5 to 100 times the earnings per share; seen another way, they’re willing to accept returns of somewhere between 20% down to 1%, depending on their mood. But generally, the number is somewhere between 10 and 25, with a mean of about 15. (Technical note: I’m going to use the Shiller PE ratio, which replaces the current-year earnings with the average of the past 10 years of earnings, to produce a smoother result. Some people argue that the Shiller ratio more accurately reflects valuations.) Historical values of the PE ratio are shown in Figure 2.

Shiller PE ratios
Figure 2. Stock market valuations over the years. From multpl.com

What goes up, must come down. When the PE ratio gets too high, what generally follows is a stock market crash. The crashes of ’29, ’01, and ’08 are all apparent. Currently, the PE ratio is 25; that implies that investors, generally speaking, are willing to accept a 4% return on their money. And since the historical average is around 15, there is some likelihood that the price of stocks will fall from their current ‘lofty’ levels to more normal valuations—and that the owners of stocks will lose money in the process.

How the PE ratio affects the SWR

It’s pretty well known that returns from stocks trend lower at higher PE ratios. So, naturally, retirement planners (and early retirees) want to know: with the market inflated right now at PE = 25, what SWR should we be using to decide if we have enough savings to stop working? And how worried should we be if the market tanks?

Well, since the data is all out there, let’s see how it stacks up. I’ve already shown you the historical data above; now the easy part is to plot the two data sets against each other. That’s what I did in Figure 3.

SWR vs Shiller PE
Figure 3. Historical safe withdrawal rate vs historical Shiller PE ratio.

It is amazing just how nicely all the data lines up; the trend is really very clear. But first, a couple notes on the chart:

  • The red dots are the years 1928, 1929, and 1930—which anyone will agree were among the most pathological years of the market. I left out those three points when doing curve fits, to make things prettier. Anyway, since those three dots give a very rosy picture (> 5% SWR at elevated PE), leaving them out only serves to make the conclusions more conservative.
  • The solid green line is a power-law curve fit to the data—the “average”, if you will.
  • The dashed green line is my eyeball fit to the lower bounds of the data—the “worst case scenario”.

The takeaway here is really quite clear: the higher the PE ratio is, the lower your assumed SWR should be in your retirement planning. At present-day PE of about 25, the SWR is about 4%, which corresponds to the worst-case SWR in Bergen’s work. On the other hand, if you retire in several years, and the PE ratio has by that time fallen to, say, 15, (either because prices have fallen or earnings have risen) then your SWR is really more like 5%. And if you retire at the bottom of a market crash, when the PE is 10…you should be able to enjoy a SWR of 6%–7%, because the recoveries after crashes tend to be pretty robust.

Psychologically, this is hugely counterintuitive! A booming market makes people feel rich and spendy; a market crash makes them feel vulnerable and frugal. But history is clear: the best time to retire is at the bottom of a crash, if you still have the money to do it.

Now of course, at market bottom when PE is low, your portfolio has presumably also been battered and your higher SWR on a smaller stash will still equate to a smaller absolute dollar amount. But it’s not quite as bad as you might think. Why? Because the rise in SWR cushions the fall in portfolio value. That effectively means this: if your portfolio value falls 20% in a market correction just before your retire, the dollar value of your withdrawal will not fall by 20%; it will only fall by 7%–8%. Figure 4 lays this out explicitly.

Drops and Spending
Figure 4. The impact of portfolio value drops on yearly retirement spending. The dashed and solid lines correspond to the dashed and solid lines in Figure 3.

As a rule of thumb: if your portfolio drops by x%, you will always be safe by dropping your planned spending by x/2 %. To make this concrete, here’s a scenario that may well be completely realistic:

  • You have, again, a cool $1M invested in the stock market today, where the PE ratio is 25. You plan on using a 4% SWR, in accordance with Figure 3, when you retire in December of this year. That will give you $40,000 per year to live on. You figure you need $35,000, so you have a small cushion.
  • In November, the stock market ‘corrects’, losing 40% of its value. Your $1M has become $600,000. Your 4% SWR now says you have only $24,000 per year to live on if you retire in December…which is not enough.
  • But now, since the stock market tends to recover robustly after a crash, you re-figure your SWR based on the new PE ratio (which is now 40% off its high of 25, and so is 15) and find that it’s now 5.5% (using the average) or 5% (using the worst case). So your actual dollar withdrawal available is now somewhere between $30,000 and $33,000…not quite the $35,000 you needed, but way closer than $24,000. Now, you just have to exercise some flexibility to make your spending match your new SWR, and your retirement, though dented a little, is saved.

In this scenario, you lost $400,000 in market value, but your available spending only fell about $7,000 per year (not $16,000, as a rigid 4% SWR would dictate). The market’s history tells us that disasters just aren’t quite as bad as they seem.

Epilogue

Received wisdom is both a fantastic shortcut to understanding the world and a dark woolen blanket covering your eyes—that is, it can work for you, or work against you. In this case, the 4% SWR rule of thumb gives you a quick answer to whether you are in the ballpark of being able to retire on your savings. But applied rigidly, it can also be misleading, and many of the personal finance bloggers out there have opined that, due to their own conservatism using the 4% rule, they worked too long and have more money than they really need. On the other hand, by understanding where the SWR comes from in the first place, and what factors influence it, we can make the concept work for us to make the world’s uncertainty seem a little less daunting. And that, in turn, frees up some of our mental cycles from worrying, and lets us pursue other things—things leading further toward our Jailbreak.

Finance

Do not toil to acquire wealth; be discerning enough to desist. —Proverbs 23:4

Jailbreak is an elusive state. Usually, our day-to-day lives provide us with distractions aplenty, each one in its insidious way keeping us from a quiet consideration not only of how to achieve Jailbreak, but also of even what Jailbreak means to us. Sometimes, we self-distract with mental junk food; other times, we sit in analysis paralysis over some decision. At my worst, all of my distractions will pile onto me just before bed, and I will lie awake in interminable distraction…which not only accomplishes nothing, but ensures that the next day I will be exhausted and unable to consider anything, much less difficult-to-grasp topics.

But let’s face it: among the distractions, both the imposed and the self-imposed, few are as all-consuming as money. Most of us spend eight hours a day—half of our waking hours, five-sevenths of the days of the week, working at jobs in order to bring in money. In the best case, we’ll spend as little as only one extra hour preparing ourselves to do this…dressing, commuting, etc. Because we spend so much time and energy working to bring in money, we also spend a good bit of time “decompressing” at the end of the day. And for the ambitious, the notion of a 40-hour work week is laughable; the reading of career-oriented books, attendance at “networking” events, and planning a career trajectory all combine to turn free time into “quasi-work” time. All told, the pursuit of a paycheck, though necessary and good, can consume virtually all of one’s time and mental energy, in one way or another.

Some people live for this. The adrenaline rush of job performance is a reward in itself. The feeling of power and success that comes from moving up an organization’s ladder, or the heady glee that comes from leapfrogging the ladder altogether by jumping between companies, or the self-reliance that comes from the entrepreneurial push to create a new personalized job, all can provide a sense of meaning and purpose. A lucky few also find the work that they love doing so much that they would do it for free…and the paycheck is just a way to make sure they don’t have to do anything else.

Whether that’s you—or whether you are the polar opposite, and hate laboring in your personal coal-mine—one question we all face is: what do we do with this money that we earn? Some things are given. We acquire food, shelter, and clothing, and provide the same for those who depend on us. We provision some security services: e.g., health insurance. And we go on to get some convenience and entertainment: cars, cell phones, televisions, more clothes, food in restaurants. We all have our own lists. And we all choose to draw the line somewhere: this I will buy; that I will not buy.

One thing that too few people buy is one of the most important things that can be bought. Freedom. The problem is that you can’t find it in any store. If you go looking in stores or online or in advertisements, you will only find clothes, and restaurants, and electronic gadgets, and cars, and cable packages. No freedom anywhere. Nobody makes money off of freedom…except you. So nobody is going to try to convince you to buy freedom…except you.

Money can’t buy you love…never more true words were spoken. Can money really buy freedom? Yes, and no. Money can’t buy freedom from your inner demons. It can’t buy freedom from your past. Too many celebrities and lottery winners end up broke and in rehab because they think they are buying their way to happiness with their enormous riches. No, money can only buy you freedom from one thing: itself. Fortunately, since so much of our lives revolve around the earning and spending of money, money’s limited power to free us from itself is actually exceedingly powerful.

To understand how money can buy freedom, first understand how it can buy imprisonment. For $700, you can buy a new iPhone and pay $70 per month for a service plan. For $1,000 down, you can buy a new SUV and pay only $400 per month for it over the next five years. For $5,000 down, you can buy a beautiful motorboat and pay another $400 per month for it over 10 years. For $50,000 down, you can buy a nice suburban house and pay $2,000 per month for the next 30 years…and taxes, maintenance, and HOA fees in perpetuity. And for absolutely free, you can sign up for cable TV, magazine subscriptions, streaming video services, club memberships, warranties, service plans, and insurance to cover loss, theft, and destruction of all the things you have already bought.  You can get house cleaners and landscapers for your nice house; good dry cleaning for your nice suits; stabling for the horse that you can’t keep in the back yard. Go a little further, and you can also engage a pilot to fly your pretty new executive jet. And you can always sign up for credit cards or revolving credit lines to cover anything you can’t quite pay for…at the cost of 20% annually.

Having money allows you to acquire things; those things require money to maintain, upgrade, or replace. The more money you have, the more things you can buy; the more things you buy, the more you commit yourself to spending. It need not be said that the more you commit to spending, the more you must work to earn what you have in effect already spent. And—violà—you have bought your way into a comfortable, middle-class Jail. There will be no leaving unless you serve out your sentence—30 years at 3.7%—or you go bankrupt. One way you walk out into the daylight, gray-haired and grateful to finally be out. The other way is just a transfer to a place far worse.

It doesn’t have to be this way. It is too often this way, but it doesn’t have to be. The path away from this Jail—toward financial Jailbreak—is probably the world’s worst-kept secret, but it is so rarely trod. It has been featured in books: The Millionaire Next Door comes to mind. It is in Thoreau. It’s in the Bible. There have been no shortage of people who, in the course of history, have pointed out that stuff doesn’t make you happy, that debt is ruinous, and that making yourself feel rich by spending like you are rich will just make you poor.

In the context of Jailbreak, money distracts. It distracts when you earn it—especially if you are working a job you would rather not be working, but regardless, if you are dependent upon the money, you are never truly working on your own terms. It distracts when you spend it—you have to spend a lot of time figuring out what you want to buy and then buying it. And it distracts in its aftermath: you have to maintain your stuff, you have to service any debt, and you need to worry about whether you will be able to do any of it.

Thoreau said—and I agree with him on this, though I don’t agree with him on everything—“A man is rich in proportion to the number of things which he can afford to let alone.” I can attest to this from personal experience. When I was in graduate school, I was the only one among my friends who didn’t own a car. They told me that I should get one—we all made pretty good stipends, after all (it’s good to be an engineer). But in truth, I saw no need. I lived just off campus, where the most extensive libraries I had ever seen housed almost any book I could ever think want. The university symphony played almost monthly in the concert hall. I walked across the beautiful forest-and-castle campus to my lab every day. I occasionally had the grocery store deliver groceries, or I would walk to the nearer (but dearer) organic-foods store for small supplies. All my needs were easily met without a car, and I could not see at all why I would want to spend the time to 1) find a car, 2) buy the car, 3) register and insure the car, and 4) maintain the car. Perhaps there were some other things I might have done occasionally if I had a car. But I can say with certainty that my life was simpler without one, and I read more books and took more advantage of the university’s resources. Life was also cheaper. Based on that single decision to not buy a car, I was able to pay off all my remaining undergraduate student loans by the time I finished graduate school.

If you need to watch the latest TV shows, or all the college football games, you not only have to devote $70+ per month to your cable subscription, but you need to devote several hours per week to watching it all. If you need to be a wine connoisseur, you not only have to devote a few hundred dollars per bottle to your collection, but you have to spend time finding and acquiring the wines, and devote space and electricity to the climate-controlled wine cellar. If you need to have the latest electronic gadgets, you not only have to walk the $700 iPhone upgrade treadmill, but you should really be reading the industry news to make sure you know what features you’re really after and what you can brag about when showing off your newest model.

Do you see? Not only does all of this stuff cost money…it costs you your attention and your time, three times over, once when you earn the money, once when you spend the money, and once when you use and maintain the stuff. With all your time taken up in the pursuit of stuff, where will you find the time to Jailbreak?

So what do you do instead? How can money, rather than being a distraction, help you achieve Jailbreak? I suggest that getting to the answer looks something like this:

  • Choose something you want and have but could do without (cable TV, new electronics, new leased cars…).
  • Get rid of it.
  • Stop and enjoy your new free time. Consider what else you might get rid of to create even more free time.
  • Invest the money you’re now saving in paying down debt or in income-producing assets (stocks, bonds…)
  • Stop and enjoy the mental freedom of knowing your debt burden is permanently smaller, and growing smaller by the month. Or that your passive income stream is permanently larger, and growing by the month.
  • Repeat.

There are a ton of specifics to get into on this topic: what should you eliminate? How should you invest the money that you save? Just how much of a standard middle-class lifestyle can you get rid of and still enjoy a decent quality of life? (Or is that even a good question?) We’ll discuss some of these things here in the future. But they have been talked about an incredible amount in the personal-finance blogosphere already. Some of my favorite blogs on the topic are Mr. Money Mustache, Go Curry Cracker! and jlcollinsnh. For loads of specifics, these are invaluable resources.

To wrap up, then: just how does all of this talk equate to money buying freedom? The simple answer is: money first buys you freedom when you can have it, and not feel compelled to spend it. It buys you more freedom when you can choose to buy things that give you back more money (investments). It will buy you a final dose of freedom when the investments that you have bought produce enough money to cover those things that you still feel compelled to buy. And that is complete financial Jailbreak. You have redeemed a huge chunk of your life from the pursuit of money and the stuff it buys—and are now free to pursue Jailbreak in the rest of your life.

Finance